Inflation Update – Still Benign

Inflation remains benign based on data released by the BLS and the latest reading from the Orcam Housing Adjusted Price Index.  According to the BLS consumer prices rose at a modest rate of 1.7% year over year.  The softness in the headline reading came from declines in energy prices which were down 1.2% over the year.  The core reading was unchanged on the month at 1.9%, a bit higher than the headline and still consistent with accommodative Fed policy.

Here’s the BLS with a bit more detail:

The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.

The gasoline index declined again in December, but other indexes, notably food and shelter, increased,
resulting in the seasonally adjusted all items index being unchanged. Gasoline was the only major energy index to decline; the indexes for natural gas and electricity both increased. Within the food category, five of the six major grocery store food groups increased as the food at home index rose for the
third consecutive month.

The Orcam Housing Adjusted Price Index was a bit higher on the month at 2.84%.  The divergence in the OHAPI and the CPI has grown in recent months primarily due to the rise in housing prices which are beginning to ripple through the economy.

All in all, prices are still relatively benign.   Not a big surprise given the lack of cost push inflation from energy prices and the lack of demand pull inflation from the weak economy….

( Figure 1 – Inflation Indices via Orcam)

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

    • Shadowstats exists for the gratification of cranks and conspiracy buffs. If you want an alternative source check out MIT billion price project, which is in line w/ the BLS numbers – perhaps a little higher, but they don’t measure the costs of services, which have had smaller price increases.

      • That’s not really the direction I was going in. Obviously predictions of hyperinflation based on QE demonstrate a lack of monetary mechanics understanding (such as MR), that much is given.

        I was really focusing in on the changes in methodology introduced by the BLS over the years, such as substitution and hedonics.

        The evidence is quite compelling that the BLS (perhaps influenced by legislation over the years) purposefully understates CPI (via such strategies as substitution/hedonics) in order to minimize government transfer payments.

        What are your thoughts on this Cullen?

        • Could be. Its one reason I use a housing adjusted CPI. I think its absurd to list rents only, but wonky economists wont count house purchases as consumption. The OHAPI is historically much higher than the CPI.

          • “Allowing substitution of lower-priced and lower-quality goods in the basket (i.e. more hamburger when steak prices rise) lowers the reported rate of inflation versus the fixed-basket measure.”

            So basically price increases of goods and services (as measured by CPI) remain subdued, yet consumers are constantly forced to substitute lower quality food to maintain the same quality of life (which in my opinion translates to a lower quality of life).

  1. Hard to qualify as benign without other contextual numbers such as nominal GDP or wages.

  2. You can call ShadowStats people cranks or what not, but overall, my bills are up about 8-10% from a year earlier (I keep track for self-employment reasons). Healthcare was up 12%.

    • I’m a manager, and our health insurance costs went up 19% this year.

      And the individual deductible went up from $100 to $250.

      Not to mention that most people’s payroll tax went up about 27%.

      As far as I can tell, none of that is counted in the official measure.

      • Health insurance IS counted in the official CPI. It is weighted by the number of people impacted. Your 27% increase is atypical. Far more typical is my MetLife (large corporation) health insurance increase of about 3.5%. It is unfortunate that there is such a huge difference in health insurance between very large employers and smaller employers. Small employers should band together and form a larger group market with the health insurers.

  3. I’m always amazed at how many people use the CPI for articles, not just Cullen, but anyone. It is a fact that the calculation has been changed over the years, and no American paying his/her own bills would believe a rate around 2 percent.

    • Indeed! Inflation is rampant! Look at asset prices. Everything, except housing, I can think of is massively overpriced. There has been MASSIVE asset inflation since 2009. Sure there is little inflation in goods and services. Its all flowing into assets. You are an idiot if you think there is no inflation. Just look at the SP 500 since 2009.

      • Houses and cars, which are the two most expensive things most of us ever buy, are not inflating much. New car prices are only going up about 1.4% a year. Houses are less than they were in 2007. Also consumer electronics prices are falling. Computers, TV’s, DVD players, cameras, etc are all falling. That is what is hurting the Japanese exporters. MIT has a one million price project (Google it) and their very scientific measure of a million prices of different things is running very, very close to the US CPI of around 2%. We like to complain about the few things going up dramatically. It is a bias we need to eliminate.

        • I can’t speak for everyone, but the number of houses and cars I buy a year are extremely low…mostly zero, resulting in zero savings. Of course house prices are lower than 2007, we just had a bubble pop.

          Yes, consumer electronics is about the only industry worth noting, as it is simply amazing what competition and innovation can do for the consumer. Then again, how often are cash strapped, lower wage earning consumers buying these products? Are consumers really better off from falling prices if they feel the need to buy the latest iGadget every six months? lol. (These are rhetorical questions, but something to consider.)

          The MIT inflation project covers 100% of what the CPI does, so I’m not sure how that would provide much insight on the true inflation picture. From what I can tell, it updates faster with it being a daily report.

          I don’t think its a bias, but rather a reinforcement of a saying i’ve heard throughout the financial crisis, “Inflation in things we need, deflation in things we don’t.”

          You mentioned that you saved on refinancing, which is great news, but at what costs? Meaning, we have low rates across the board. Instead of receiving yield on CDs or savings accounts, you simply booked it on your mortgage. Is the swap perfect, probably not, but let’s at least recognize the financial environment your refinancing savings came from.

      • S & P 500 is still lower than it was in October 2007 high of 1550. It is down over the last 5.5 years. You need to take a longer perspective. It is also flat over the last 13 yrs going back to March, 2000. Asset prices have been going sideways for 13 years.

    • I pay all my own bills, and overall my bills are going up very slowly, at less than a 2.5% increase. My biggest bill is my mortgage. It has gone down twice in the last 5 yrs because I refinanced twice at lower rates. My natural gas heating bill has also gone down. Electric bills are flat because my electric utility is using more cheap nat gas. Yes, some things are going up faster than 6%, but they have been offset by the ones going down or staying flat.

  4. aside from the fact that government data is at very least questionable. wouldn’t prices normally fall in a recession? isn’t that what leads to increased demand and an eventual long term sustained recovery? this economy is the worst of both worlds, slow growth and high prices.

  5. IMF Food index (includes Cereal, Vegetable Oils, Meat, Seafood, Sugar, Bananas, and Oranges Price Indices) is up over 8% since last year.